The direction of market movement.

Author: Zezhao Fang
Zezhao Fang
Zezhao Fang
I hold a degree in Statistics from the University of Waterloo. As a graduate, my academic focus has equipped me with strong analytical and quantitative skills. While I currently do not have a specific profession or work experience, my education has honed my abilities in statistical analysis, data interpretation, and problem-solving. I am well-versed in various statistical methods and techniques, making me adept at deriving meaningful insights from data.
Reviewed By: Andy Yan
Andy Yan
Andy Yan
Investment Banking | Corporate Development

Before deciding to pursue his MBA, Andy previously spent two years at Credit Suisse in Investment Banking, primarily working on M&A and IPO transactions. Prior to joining Credit Suisse, Andy was a Business Analyst Intern for Capital One and worked as an associate for Cambridge Realty Capital Companies.

Andy graduated from University of Chicago with a Bachelor of Arts in Economics and Statistics and is currently an MBA candidate at The University of Chicago Booth School of Business with a concentration in Analytical Finance.

Last Updated:February 1, 2024

What Is a Trend?

A trend is the direction of market movement. There are two types of currents: upside currents and downside currents. There are three broad types: primary, secondary, and transient.

There must be a corresponding cycle and reference when talking about currents, and the current will always run in the direction of the least market resistance.

It is a regular conclusion obtained by observing the financial trading market (stocks, futures, foreign exchange, etc.) and the main tool of the market. 

One of the three main foundations of technical analysis is that the market runs on-trend, which is the origin of the concept of the stock market. 

It is generally believed that stock prices tend to move in a current; that trading volume follows the current; and that once a round of current is established, it tends to continue to work. Financial trading gurus generally advocate that traders follow currents.

Nowadays, currents are mainly used in financial investments, and there are uptrends and downtrends. An uptrend means that prices will rise in the future. Conversely, downtrends indicate that prices will continue to fall in the coming period.

These originate from the stock market. It is the conclusion of the law of observing the financial trading market and a tool for technical analysis of the market. Generally, during a round of current confirmation, the price will rise or fall under the current.

In the trading market, there is also trend theory. The basic contents are the meaning and types of currents, how to draw lines, and how to determine support and resistance levels. This theory is an important part of the technical analysis of the stock market, as well as wave theory, k-line theory, pattern theory, and mean theory.

How does the trend work?

Concerning trend theory, John Mackey and his co-author Robert D. Edward have comprehensively summarized and further developed the ideas of the founding father of technical analysis, Chad Chaback.

To date, their Technical Analysis of Stock Market Trends is a very important classic work and is considered the most authoritative exposition of the early Dow theory.

A typical current movement process has several key characteristics. Firstly, the development of the current is usually not confirmed. Once the current is confirmed, this confirmation will reinforce the current development and lead to a self-propelled process. 

In the early stages of current formation and strengthening, doubts will arise several times, only to be dispelled several times. Again, after a few shocks of doubt, the current development remains the same. But, then, the current is bound to go through an acceleration process. 

Then, the market begins to show extremes, with serious distortions in market behavior and the market entering an irrational state. This also signals that a climax is coming. Finally, the public perception of the market is highly aligned, and the market is in a frenzied, self-propelled stasis.

A reverse movement is imminent. Markets are often full of excesses and prone to extremes. The more people follow a market, the more likely it is to continue and strengthen. 

Sometimes market prices are no longer just a reflection of fundamentals; they become fundamental in their own right, influencing price fluctuations.

What are trend lines?

A current line is a line drawn to connect the lows or highs to project the general direction of the price the next day. The stock price fluctuation will move upward if it is in an uptrend. Conversely, stock price fluctuations move downward.

With a correctly drawn current line, investors can get a general idea of the future direction of stock prices. The fluctuation length varies, and a current emerges with short-term current lines, current medium-term lines, and current long-term lines.

A trend line is a line used by technical analysts to plot the past price movement of a security (stock) or commodity futures. The purpose is to predict future price changes. 

The line is formed by linking the highest or lowest price points of the security or commodity futures that have risen or fallen over a specific period. The final angle of the line will indicate whether the security or commodity futures is in an upward or downward current. 

If the price rises above a downward-sloping trend line or falls below an upward-sloping current line, technical analysts generally believe that a new price direction may emerge. 

Trendline analysis is generally considered to be a method of technical analysis. However, trendline analysis must be combined with other technical analyses for better results.

Trendlines are one of the most common of the many methods of technical analysis, but at the same time, current lines are not used effectively and adequately.

How to draw a current line correctly, which is as accurate as any other technical analysis method? But the problem is that most traders cannot draw current lines correctly, or they try to make the current line fit the market when what we need is to make the market fit our current line.

In its most basic form, a current line is a straight line connecting an obvious area of support (the lowest point) in an uptrend. A straight line connecting an obvious area of resistance (the highest point) is also a trendline in a downtrend.

Types Of Trendlines

The stock K chart's three colors are blue, pink, and yellow. The blue line shows the J value, the pink line shows the D value and the yellow line shows the K value. 

The KDJ indicator consists of three lines, K, D, and J. K is the fast line, D is the slow line, and J is the direction-sensitive line. 

A golden cross is formed when the K line crosses the D line upward, which is a buy signal. When the K line crosses the D line downward, a death cross is formed, a sell signal.

These three lines make up the KDJ indicator. If the J line is on the KD side, it means growth. If it's on the contrary, it means a fall. Below, the different trendlines will be described.

There are four types of current lines:

  • Uptrend lines
  • Consolidation trendlines
  • Downtrend lines
  • Central current lines

1. Uptrend line

In the rising band of the stock price, connecting the bottom point of the stock price, generally connected to the rising current line, will be very regular. When the stock price falls to the rising trendline, it is a buy signal, and you can lightly buy.

2. Consolidation trendline

It indicates that the stock price fluctuates up and down within a certain range. Generally, the consolidation current will appear after the stock price rises or falls, so you can choose to wait and see.

3. Downtrend line

Connects each price high to form a downtrend line. Generally, the original downtrend is relatively flat and long. However, short-term downtrend lines are generally steeper and shorter.

4. Central trendline

The stock price shows symmetrical up-and-down fluctuations, connecting the long-term highs and lows to form a trendline, which generally has a large impact. 

When the central line appears fan-shaped, it will form a relatively large support or pressure point, and the possibility of a market reversal is high.

How to draw a trendline?

A valid, current line can be drawn with two bottoms or tops, but it takes three tops or bottoms to confirm. So the steeper the trendline, the more likely that trendline will be broken. 

As with horizontal resistance support, a trendline that has been tested many times is a strong trendline and relatively difficult to break. Most importantly, never draw a trendline by forcing it to fit the market. If the current line does not fit the market, then the current line is not valid.

To draw a current line correctly, we just need to find two tops or bottoms that have some meaning and connect them correctly.

We can draw a line to measure the current situation based on the definition of a current.

  1. For an uptrend: We can connect the bottoms so that most are on the same line as far as possible.
  2. For a downtrend: We can connect its vertices so that most vertices are on the same line as far as possible.
  3. For a sideways trend: We can connect the tops and bottoms straight to form an oscillating range.

Then when the price movement breaks the corresponding current line, we can assume that the current may be reversing. 

The current is composed of different levels of large and small currents, where the direction of the advanced current determines the direction of the final price movement. 

Therefore, when using current lines, it is important to pay special attention to the level above the current line. Thus, determining the range of price movement illustrated by this current line.

What are some applications of trendlines?

The money curve is the most visual indicator of a trader's trading position. The magnitude, angle, and market sentiment of a trader's recent trading status can be observed through the pull-up or pull-back of the money curve.

When the money curve shows a large decline angle, the magnitude is more than half of the previous profit. It is safe to assume that the trader has lost control. Therefore, there is an urgent need to exit the trade and take some time off to recuperate.

Below are the two most important applications of trendlines.

Application of trendlines in futures trading

Trendline breakouts are often used to analyze price action, which is a new position. Or, if you are looking for an opportunity to close an existing position, the breakout of a compact trendline often constitutes a great signal. 

Of course, other technical signals must always be considered as well. In addition, these lines can be used as entry points when they act as support or resistance. 

Buying on the upper side of a major uptrend line or selling on the lower side of a major downtrend line are effective timing countermeasures.

The application of trendlines in foreign exchange trading

  • First, it is clear that the current reflects the exchange rate's current, which is useful for our analysis.
  • Second, the current line application inertia principle, that is, things in the process of movement of a change in the current, such as the rising process in the market, need to go through a period of slow speed to enter the down situation again.
  • Third, the concept of wave theory channels and the principle of current lines have similarities and differences.

The current line theory can also be considered part of the tangent theory. Connecting different points presents an upward or downward current of the exchange rate. Or, when the curve is smoother, it reflects a consolidation current in the market. 

According to the length of time, we can say that the current is divided into three different categories: short, medium, and long. A combination of different short-term currents forms long-term currents, and short-term current lines are the most important.

Trend analysis methods

The current analysis method is to analyze the change of each period of the relevant index against the base period. It is a method of analysis from which problems are identified, and clues are provided for pursuing and checking the accounts.

For example, by analyzing the current accounts receivable, it is possible to evaluate the possibility of bad debts and the number of goods that should be collected. The current analysis method can be used in relative or absolute numbers.

Trend analysis focuses on comparing financial or non-financial data for two or several consecutive periods to determine the direction, amount, or magnitude of increases or decreases to grasp currents in the data in question or detect unusual changes. 

A typical current analysis compares data from the current period with previous ones, while more complex current analyses involve comparisons across multiple accounting periods. 

The data used for the current analysis can be either absolute or relative values expressed as ratios.

The main forms of current analysis include 

It is most applicable when the audited entity is in a stable business environment. 

The method is no longer applicable when the business or operating environment of the audited entity changes significantly or the accounting policies change significantly

The number of accounting periods involved in the current analysis method depends on the stability of the audited entity's operating environment. 

The more stable the business environment is, the more predictable the data relationships are, and the more relevant it is to compare data from multiple accounting periods.

Trend FAQs

Researched and authored by Zezhao Fang | LinkedIn

Reviewed and Edited by Krupa Jatania LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: